Man Bites Dog: Former Merck CEO Blasts High Drug Prices

(MoneyWatch)  Most pharmaceutical companies insist that high drug prices are a natural consequence of the risky business of drug discovery, and that huge profits on marketed drugs are necessary to cover the costs of the 5,000 to 10,000 experimental drugs that fail for every one that succeeds. In fact, there are pretty good reasons to think that drug pricing is more a matter of charging whatever the market -- meaning, for the most part, insurers and the federal government -- will bear.

Still, you don't tend to hear drug-industry executives go much beyond the standard boilerplate on pricing, which is why it was so interesting to see former Merck CEO Roy Vagelos blast high drug prices last week at the annual meeting of the International Society for Medical Publication Professionals. CNBC's Mike Huckman was there and blogged up Vagelos' remarks:

In yesterday's speech Dr. Vagelos said, "Most drugs are a terrific bargain." And he believes that high prices are justified if the drug offers high value. But value, of course, can be subjective. Dr. Vagelos was diplomatic enough not to identify the company from behind the lectern--you can probably figure which well-known biotech he's referring to--but he went on to say that he has a problem with the $50,000 price tag for a drug that adds four months of life.

"There is a shocking disparity between value and price and it's not sustainable," he said. "The industry will bring about government price controls which will be devastating for the industry," Dr. Vagelos added. And if the feds don't step in, he believes market forces will.

In answer to a question Dr. Vagelos said, "I don't care what the cost is, it's inappropriate. The industry has a black eye. And the market will correct that." Drug and biotech companies, including the one he's talking about, say they need to charge those prices to recoup their investment and to pay for research and development of something better.

In addition to lowering prices on certain drugs, Dr. Vagelos also thinks pharma needs to be even more philanthropic: "When important drugs are introduced companies will have to make arrangements to get them into the developing world."

Besides saving lives he believes the humanitarian gesture will generate goodwill in countries and regions that in the not-too-distant future could become lucrative growth markets for the industry. It would also go a long way, Dr. Vagelos argued, toward recovering and restoring big pharma's "credibility."

The drug Vagelos highlighted is almost certainly Genentech's blockbuster cancer treatment Avastin, which certainly isn't the most expensive drug out there, although it is probably one of the most widely used treatments to be priced in that range. (I'm not sure why Vagelos felt he had to be coy on that point.)

While Vagelos' comments were refreshing, I can't imagine that they'll have much effect on industry pricing practices. Price competition is virtually nonexistent in the pharmaceutical industry -- in fact, it's fairly common for new drugs to cost exactly what competing drugs sell for -- and there's little sign that it might break out any time soon. Instead, the industry is busying itself stomping on insurers who offer cash bonuses to doctors that prescribe fewer high-priced, brand-name drugs.

Price controls of some sort, meanwhile, strike me as a real possibility, particularly if healthcare reform remains a hot topic following the presidential election. Democrats in Congress are eager to get Medicare to "negotiate" lower prescription drug prices, which is kind of a back-door price control, although those efforts haven't gone anywhere this year. Although the threat of controls is real and growing, it hasn't yet had much impact on drugmaker behavior, especially since companies have been raising drug prices at a rapid clip for most of this decade.